A View from China on Overcapacity and Investment Treaties

Over at the Pekingology newsletter, Yuxuan Jia, a Research Associate at Center for China and Globalization (CCG), has a translation of some recent remarks by Chen Deming, CCG’s Honorary Chair and a former Chinese Commerce Minister. The remarks cover a range of issues, but I wanted to focus on what he said about overcapacity and investment treaties, because it's interesting to see how people in China are thinking about these things:

After decades of development, China has made tremendous progress, but there are still bottlenecks and difficult problems to overcome. In particular, the current situation of strong supply and weak demand is another reason for Chinese companies to consider going global.

Why do I say “strong supply and weak demand” rather than “overcapacity”? Because what this situation really reflects is weak demand and insufficient consumption, alongside substantial production and supply capabilities.

If it is simply described as overcapacity, it creates the impression that China’s excess production alone is responsible for international trade surpluses and deficits. That is not something China accepts.

Supply and demand are extremely difficult to balance across the entire world economy, let alone calculate precisely. The real question is how to increase consumer demand around the world. And that requires investment.

Many Chinese companies have already been through years of intense competition at home, and now they are entering foreign markets. This is a very important development.

So, to put it simply, Chinese companies have good reasons to go global: China’s responsibilities as a major country, the success it has achieved through reform and opening up, and the current imbalance between strong supply and weak domestic demand.

The second issue I would like to discuss is what the government should do to support companies going global. In other words, what are the government’s functions and responsibilities?

Earlier this morning, Vice Minister Chen Jian, who was responsible for outbound investment at the Ministry of Commerce for many years, gave us an excellent presentation. He discussed the State Council’s regulations, as well as specific rules issued by the Ministry of Commerce and other government departments.

There is one point I would particularly like to emphasise: China still needs to sign more specific bilateral investment agreements with key countries and regions. This is something I’ve come to appreciate through my own experience.

China had long sought to negotiate a bilateral investment treaty with the United States. During the Obama administration, negotiations on the treaty text had essentially been completed, with the provisions agreed upon by both sides. The two countries were approaching the final stage of reconciling their respective negative lists when Donald Trump took office as the 45th president of the United States.

His administration then brought the entire negotiation process to an end, and the talks have not resumed to this day.

Now that Trump is back in office as the 47th president and is calling for businesses to return to the United States, I wonder how different things might have been if China and the United States had concluded an investment treaty with a clearly defined American negative list.

I have a couple reactions here.

First, he says "[t]he real question is how to increase consumer demand around the world." I can see how it would be helpful to producers if consumer demand went up, both around the world and within China, but I don't think that's an easy thing for governments to control or guide. Yes, there are things they can do in the short-term, but there are limits here, especially when you look at how things play out over the long-term. Many times your short-term boost to demand will lead to reduced demand down the road, so you are really just shifting demand forward and not getting an overall increase.

As a result, when you are dealing with concerns about production capacity matching demand, I think it might be better to focus on the producer side. In this regard, state support of various kinds can lead to companies producing more than the market can handle. Some companies even keep operating when their lack of profitability suggests they should go bankrupt. Reining this situation in is a good way to get to production that matches consumer demand.

With regard to Chinese consumer demand in particular, I know there are a lot of people focused on this demand as a way to "rebalance" trade, but I remain skeptical that this is going to budge much. I would put the emphasis instead on trying to get Chinese production to shift towards more market-based decision-making. WTO complaints are a good avenue to take here, but for reasons I've never found very convincing, people haven't wanted to use this approach in recent years.

Second, on investment treaties, in general terms the evidence of investment treaties leading to more foreign investment is inconclusive. So, I'm not sure signing on to these treaties makes much difference, except to the livelihoods of international investment lawyers.

As to the China-U.S. investment treaty, I am very skeptical that such a treaty would have been approved by the U.S. Senate. In my view, the idea of Chinese companies, either private or state-owned, suing the U.S. government before an international tribunal would have been unacceptable to many Senators.

But even if the treaty had been ratified, I don't think it would have had much impact on the level of Chinese investment in the U.S., because, as noted, investment treaties don't have this effect. Is Chinese investment in the U.S. a special situation, in which a treaty would reassure Chinese investors that their investments would be protected, and suddenly this investment would boom? I doubt it, because U.S. courts offer plenty of opportunities to sue the government already. On the other hand, we would likely have had some controversial ISDS lawsuits, which would have been generated lots of billable hours, scholarly articles, and blog posts!